Broadening economic recovery

Samvat 2077 saw an extraordinary mix of best and worst times. The market rally took stocks to their best performance in 12 years, backed by an even bigger surge in cryptocurrencies and commodities. India also managed to administer one billion vaccine doses of Covid-19, fully protecting roughly one-fourth of the population. But on the downside, the second wave overwhelmed the health care system, raising the death toll. There have also been persistent unemployment and distress across the informal economy. Interest rates have been held low while inflation has run high to add some more paradoxical elements to this jigsaw puzzle of contradictions. Where will Samvat 2078 take the economy? The jury’s out on the quality of the ongoing economic recovery — will it be fast enough, broad enough, and sustained enough? How long will it take to achieve some level of herd immunity to address Covid concerns? How will the country respond to a third wave? Will the educational system have the resilience to compensate for the loss of classroom learning?

The answers to some of those questions will arrive with time. While the economy is in recovery mode, the recovery has been K-shaped and uneven. Segments like travel, hospitality and entertainment have slipped back five years. The formal economy, and higher-income groups, have done much better than those at the bottom of the pyramid. Activity in the informal economy must accelerate if consumption is to pick up. The fast-moving consumer goods sector and two-wheelers are running below 2018-19 levels. Recovery depends on a pickup in lower-income household expenditure. In sectors like realty, there’s been consolidation as smaller, under-capitalised developers have been swallowed up by larger groups. So far as the stock market is concerned, the journey north has been fuelled by easy liquidity, loan moratoriums, and tax cuts that helped heavily indebted businesses to deleverage. The liquidity has also led to a great opportunity for initial public offerings (IPOs) and start-ups, since it has allowed entrepreneurs to raise money at a rapid clip. Foreign investors have also been extremely optimistic, pumping money into rupee assets. Further, a global commodity rally has both helped, and hurt. Miners and manufacturers of industrial metals have generated bumper profits. But uptrends in oil and gas prices, coupled with high taxes on fuels, have also led to inflation, making people more averse to discretionary consumption.

Samvat 2078 is likely to see lower equity returns for several reasons. One is simply a higher base. Another is tighter global liquidity. The Fed has announced a taper, which could impact foreign inflows. The Reserve Bank of India has tightened regulations with respect to borrowing to subscribe to IPOs. This would impact the primary market from next April. China’s real-estate bubble with its high indebtedness is also a clear and present danger for the global economy. The low base effects of last year are now moderating. Most businesses are complaining about margin pressures and soft demand. It would be unrealistic to expect the current earnings growth rates to be sustained — indeed, growth eased up in the second quarter. But investors can hope for a broadening of economic recovery, putting money into more pockets and driving consumption. This must be aligned to vigorous vaccination drives, strong infrastructure spending, tax rationalisation, and other policy measures to drive growth, and broaden the base. None of this is rocket science but implementation will be key. Samvat 2078 arrives accompanied by a mix of hopes and fears. Happy investing!